Mining Makes a Comeback in Latin American Countries

Posted By on February 22, 2014

Current State of the Gold Mining Industry

The past three years have seen many established gold exploration companies rushing to Latin America in search of mineral deposits. Just a decade ago, the global value for an ounce of this precious metal was around US$400. Mining companies were reluctant to venture into countries where gold deposits could not produce healthy returns. However, in September 2011, the global bullion prices soared to a record US$1,921, giving companies that specialize in mining minerals a good reason to venture into South America. In other words, companies that had, until that time focused their operations in the big four producers of the mineral (Canada, the US, South Africa, and Australia), began to venture into smaller and often less politically stable nations in Spanish America. As a result, countries such as the Dominican Republic, Bolivia, Colombia, Guyana, Suriname, and Brazil have seen an increase in mineral explorations activities by mining giants in the recent past. In turn, some countries in Spanish America began to capitalize on the high value of precious metals in the market by pressing miners to pay steeper royalties and taxes. In 2011, Chile and Peru, two top producers of minerals in the region, were among the first countries to increase mining royalties for precious metal revenues.

gold globe

Brief History of the Mining Industry in Latin America

Historically, two terms can best describe the mining sector of the economy in Hispanic America: profitable and controversial. In terms of profitability, about nine countries in this region have significant gold deposits. The largest gold producer in the continent is Peru, which is also the sixth largest producer of the metal in the world. According to a World Bank report, the country produced around 188 tons of this prized metal in 2011, which was roughly 6.67% of global output for that year. The production earned the country’s economy about $10 Billion, and accounted for about 15% of the country’s GDP that year. Most of the country’s reserves lie on the Yanacocha Mine, which is jointly run by Newmont Mining and Buenaventurda Companies. The economies of Argentina, Brazil, Chile, and Venezuela also depend heavily on mining as a source of revenue.

Nevertheless, controversy plagues the mining sector in Spanish America. This is primarily because majority of the top mining companies operating in this region come from abroad. Companies such as Barrick, Goldcorp, and Newmont are the major players in this space in the continent. Many local people consider these foreign companies as representations of neoliberal practices aimed at benefiting a few at the expense of many. In 2012, mining conglomerates operating in the Dominican Republic and Bolivia experienced the sentiments of locals, after weeks of protests and agitation led to renegotiation of royalty agreements in favor of the latter.

gold mine entrance

Opportunities for Mining and Investing in Latin America

Many economies in this region rely on natural resources for their growth and survival. An opportunity to invest in these resources has seen almost 25% of the world’s exploration efforts in metals from 1994 to 2012 go to South America. According to the Metals Economics Group, the continent produces 45% of global copper supplies, 50% of silver, and 20% of gold annually. Generally, about a quarter of global investment opportunities in natural resources focus on this continent.

However, economic opportunities often face some challenges. Some of the hurdles facing prospecting and mining in South America today include:

• Nationalization: Local residents and natives want their governments to be more directly involved in the exploration and mining of resources. They see this as the only way that their minerals will have a positive effect both socially and economically. In regards improving their economic fortunes, several of the aforementioned counties have developed a legal framework that includes a number of taxes aimed at the mining sector. Mining companies operating in Chile, for example, have to pay a 20% corporate tax in addition to a 35% withholding tax.

gold bars

• Environment: Environmental degradation is of prime concern among residents living in resource rich areas. Gold mines face a barrage of criticism from environmentalists for their effects on water catchment areas, forest cover, human settlements, and animal life.

• Social economical relations: Precious metal mining has significant social economic effects among Spanish Americans. Social disorganization, criminal activities, deaths, protests, and diseases are just some of the challenges affecting communities in resource rich areas of the continent.

In summary, Latin American countries are heavily dependent on natural resources for their survival. Many countries are seeing new interest from mineral exploration companies even as traditional resource havens such as Peru and Chile continue to thrive economically from this precious metal. However, mineral exploration companies generally face numerous challenges amidst the investment opportunities in this continent.

Gold Mining In Latin America

Posted By on January 22, 2014

Mining in South America is currently experiencing a boom fueled by increased demand from investors and manufacturers of mobile devices. According to the UN Economic Commission for Latin America and the Caribbean (ECLAC), two of the world’s largest mining companies — Barrick Gold and Goldcorp are already operating in South America. Some of the countries with significant deposits of this valuable metal include Mexico, Colombia, Peru, Dominican Republic, Brazil, Ecuador, Guyana, Argentina, and Venezuela.

South America Gold Mining History

According to research carried out by Virginia Heffernan, valuable metal mining in this region goes as far back as 200 AD. However, serious exploration and mining did not take place until the Spanish conquest in the 16th century. This continued throughout the 19th century and early 20th century when countries such as Nicaragua and Costa Rica ranked among the top producers of this precious metal in the world. Nevertheless, many parts of Hispanic America remain unexplored. This means the region could become the top producer of this metal in the future.

Genesis of a New Gold Rush

The rush to mine valuable metals in South America does not necessarily mean that mineralogists have suddenly discovered unknown deposits. In fact, the opposite is true because most geologists and mineralogists have known for years that the Spanish America region has substantial deposits of this precious metal. However, low spot prices at the start of the 21st century made extracting this metal unprofitable.

A case in point is the Pueblo Viejo mine in the Dominican Republic. A report published by the University of Pennsylvania’s Wharton School states that this mine lay dormant for 13 years as companies found it financially unwise to mine a precious metal that was at one time trading at less than $300 per ounce. However, spot prices have been increasing steadily over the last few years luring companies to start operations once again and pump investment money into the economy.

In addition, most of the aforementioned countries above have mines or deposits that contain more than one million ounces of this metal. This is an important metric because most companies are unlikely to invest in precious metals and a mine that has less than one million ounces of recoverable metal. A study carried out by Price Waterhouse Coopers (PWC) found that Chile has the largest gold deposits in the region with 148,726,666 million ounces followed by Mexico at 127,857,000 million ounces. Brazil boasts of 83,422,000 million ounces, Colombia 73,768,722 million ounces, Peru 58,689,900 million ounces, and Argentina 53,598,044 million ounces.

Challenges Facing Mineral Exploration Companies in Spanish America

Taxation: In spite of viable deposits in South American countries, mining companies face significant challenges in mining them. To start with, tax regimes vary from one country to another. For example, in Chile, such companies have to pay the Specific Mining Tax that applies to taxable operational mining income (TOMI). This is in addition to First Category tax (corporate tax) at 20% and withholding tax at 35%.

In Brazil, applicable taxes include corporate income tax (IRPJ), value added tax on sales and services (VAT), withholding income tax (IRRF), and financial compensation for the exploration of mineral resources (CFEM).

Energy Costs: Mineral exploration companies also have to contend with high energy costs. For example, PWC states that mining in Mexico is quite expensive because electricity prices are high. The same is true in Brazil where 80% of the country’s electricity comes from hydroelectric plants, according to the Brazilian National Agency for Utilities (ANEEL).

Environmental Concerns: Extracting valuable metals from the ground can cause harm to the surrounding environment. For example, a study carried out by a researcher from the University of Wisconsin Madison, USA found that open pit mining in Guatemala usually involves cyanide leach processing. The problem with this approach is it is environmentally risky. As a result, mining companies have to deal with angry residents protesting against the use of metal mining processes and methods that harm the environment.

Corruption: Companies that would like to mine precious metals in Latin America must navigate a tricky landscape littered with corruption. Figures published by the Fraser Institute show that most countries in this region score poorly on the corruption front. For example, corruption in Argentina is well above the 50% mark. In Colombia, it is even worse at more than 60%. In fact, the Fraser Institute warns companies against investing in this country if they are not ready to part with bribes.

In summary, South American countries are experiencing a new rush for precious metals. Mines considered financially unviable in the past have received a new lease of life thanks to high gold prices. PWC expects this trend to continue in the near future.